Hey Contractors, How To Fill Out Aia Pay Apps Part 1

By Ron Roberts

If we grabbed the first 10 small subcontractors you crossed paths with and tested them on filling out AIA pay applications, 7 or more would probably fail the test. At least, that’s about the error rate I’ve seen while reviewing pay applications.

AIA pay applications are frustratingly difficult to fill out. To fill one out correctly, you must ignore change orders that have been approved, but not processed. You must ignore receivables still outstanding from previous applications.

Basically, you have to divorce yourself from reality.

Pay apps are an important component of cash management. When you screw up your pay app, three things might happen, none of which put you in good standing with your general contractor, and two of which damage your cash position:

1. Your project manager cuts your request to a value he can understand. You receive a partial payment.

2. Your project manager informs you that you if you don’t get a corrected application in by the deadline, you will have to wait another 30 days for payment. You may not receive any payment.

3. Your project manager makes the corrections himself and may hold it against you in the future when you need a favor or are looking for work. Like the rest of us, project managers like working with people who don’t create headaches.

You really have no choice other than learning how to fill out the AIA form correctly.

I am going to show you how to fill one out correctly. In Part 1, we attack the first page (AIA form G702) and in Part 2 we will work on the second page (AIA form G703).

Before we get started, grab a copy of the form. If you don’t have access to one, drop me an email and I’ll send you the form.

Line 1, Original Contract Sum.

The price the GC agreed to pay you for the scope of work you agreed to perform. This includes all accepted alternates.

Pull out your contract. Look at it. This number should NEVER change from your first pay application to your last.

Assume your contract was for $900,000.

Line 2, Net Change by Change Orders.

[youtube]http://www.youtube.com/watch?v=JDHEaPY6heA[/youtube]

Here it is. The line that creates much frustration.

Add up all of the change orders that have been priced and FORMALLY approved by the GC. If the project manager is sitting on your change order paper work, call him at least a week before your pay application is due and URGE HIM to complete the paper work. Being the squeaky wheel is often your only recourse.

Assume the GC has processed and signed $100,000 in change orders.

Line 3, Contract Sum to Date

This should be easy. Add the numbers on lines 1 and 2. This is your OFFICIAL contract sum at the date of this pay application.

Your contract sum to date is $1,000,000 ($900,000 plus $100,000)

Line 4, Total Completed and Stored to Date

This value comes from the left side of column G on page 2. The box is the fourth from the left, bottom row.

For now assume that you have completed $500,000 of work and have stored $50,000 of materials in approved storage sites.

Your line 4 total would be $550,000.

Line 5, Retainage (three lines).

Your contract should set the terms of retention. If it doesn’t, demand that no retention be withheld! If the GC failed to put retention in your contract, do not allow him to use it.

On a side note, if you happen to be providing a performance bond, retention is not justified. The bond serves the same purpose as the retention.

Line 5a, _% of Completed Work.

In the blank next to the “a.”, write down the current retention percentage. Typically, it is 10%. Your contract may allow you to reduce the retention to 5% near substantial completion.

In the blank next to the dollar sign, you need to write down the dollar value of retention that applies to your completed work. To arrive at that number, turn to page 2 and add together the values from the bottoms of columns D and E. Multiple by 0.1 if the retention is 10% or by 0.05 if the retention is 5%.

Assuming 10% retention and $500,000 of completed work, write down $50,000.

Line 5b, _% of Stored Materials.

Repeat the process used for Line 5a except use the value from the bottom of column F on page 2 .

Usually, the retention for completed work and stored materials is the same. Write down whichever rate is contracted next to the “b.”. In the blank next to the dollar sign, write down the retention for your stored materials.

Assuming 10% retention and $50,000 of completed work, write down $5,000.

Line 5 Total Retainage.

Add together the totals from lines 5a and 5b. This value should match your total of column I on page 2.

For our example, the figure would be $55,000.

Line 6 Total Earned Less Retainage

What you’ve earned, as far as approved change orders are concerned, is on line 4. What the client is allowed to retain is on line 5. Subtract the Total Retainage ($55,000) from your earned revenue ($550,000) and enter the difference ($495,000) on Line 6.

Line 7 Less Previous Certificates for Payment

The pay application has now entered the twilight zone. Confusion is caused by generals and owners who take so long to pay that you are submitting your next pay application before the previous one gets paid.

Natural instinct is to write down payments received to date on line 7 and ignore pay requests being processed. Don’t do that. Trust the paper trail. This pay application doesn’t care whether you’ve been paid. It only cares whether you’ve earned additional payment.

Go back to your immediately preceding pay application and write down the value from Line 6 Total Earned Less Retainage on that application. For the sake of our example, assume you had submitted to date on $400,000.

Line 8 Current Payment Due

Take your Line 7 value ($400,000) and subtract it from your line 6 value ($495,000). Write down the difference on Line 8 $95,000).

This represents the value you should be paid for worked earned during this pay period AND any change in retainage during the pay period.

Line 9 Balance to Finish Including Retainage

Take the contract sum to date from Line 3 ($1,000,000) and subtract the Total Earned Less Retainage from Line 6 ($495,000). This tells the General Contractor that he is contracted to pay you an additional $505,000 AFTER paying this application.

This is another confusing line because it acts as if all change orders have been formally processed and that all previous pay applications have been paid in full. What a dream world the AIA

lives in.

Frequently, clients and GCs only pay part of your application. The AIA form never reflects partial payment of an application. It wasn’t designed to. Keep track of what’s been paid vs. what’s been earned and invoiced (applied for).

The table at the bottom of page one is fairly straight forward. You will need to separate the change orders that add money to your contract from those that subtract money from your contract. The Net Changes by Change Order should be exactly equal to the value you entered on line 2.

In summary, following the instructions and you have a shot at getting paid everything you’re owed.

About the Author: Ron Roberts, The Contractor’s Business Coach, teaches contractors how to turn their businesses into a profit spewing machines. To receive Ron’s FREE Contractor Best Practices Newsletter visit

FilthyRichContractor.com

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